Low Cost Rivals

According to budgetairliners. com, the concept of providing low cost services can be traced in the airline industry of the United States in 1971, by the Southwest Airlines. The idea behind the said airline was very simple: to offer no-frills service to its customers by providing the lowest possible prices on its flight. Since then, the emergence of low-cost business providers has carved its own way in today’s market. For some, it has managed to compete with head-to-head with household names in the industry, as that of Aldi, a small retail outlet in Germany that managed to make it big worldwide as mentioned in the case.

Very true indeed, price wars eventually developed in the early in the 1990s not only in the wholesale-retail industry, even extending to hospitals, insurance services, pharmaceuticals, and the like. With the presence of these low-cost business providers, a new form of competition is being created, changing the views of executives in the twentieth century. What is academic on the Kumar’s point-of-view that his research shows that ignoring cut-price rival is a mistake because it eventually forces the companies to vacate entire market segments.

And that companies only have three (3) options in competing with low-cost rivals:

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First, is to attack directly, second, is to co-exist with them uneasily and lastly, become or convert into a low-cost player. Kumar’s Framework below for responding to low-cost rivals seemed realistic and applicable only for certain industries, but not all, specially here in the Philippines. Coming from the travel industry, I have noticed cut-throat competitions between travel agencies to make about a $5 to $10USD mark-up in airline tickets and package tours.

Today, even airlines are competing head-to-head with travel agents in their efforts to go directly to passengers via internet bookings. When Tiger Airways and JetStar Asia came into the Philippines, the Filipino market was skeptical and overwhelmed with its offers, as it seemed to-good-to-be-true. Passengers’ back then would often ask travel agents, “what’s the catch with this airline? ” or would probably say “I don’t think its safe. . . ” as people would tend to associate low fares with poor service.

But as time went by, the Filipino market was able to accept the low-cost carrier concept especially with the conversion of Cebu Pacific Air from a once full-service airline to a low-cost carrier (LCC) or budget airline. In-flight changes were gradually introduced by converting meals to snacks, to nibblets and eventually eliminating serving free food and drinks on-board. Tighter implementation of baggage allowance was also enforced together with the phasing out of manual tickets shifting to paper or electronic tickets (e-ticketing).

With the vision of providing lowest possible fares to the traveling public, its CEO, Lance Gokongwei, re-launched its airline with a tagline/slogan: Its time every JUAN flies, making it affordable for an ordinary person to experience flying as a convenient and cheaper mode of transportation. Imagine paying only Php1,999, Php99 or even Php1 per flight per way, exclusive of taxes! If a traveler were indeed price-sensitive, he/she would definitely consider Cebu Pacific Air. This concept indeed altered the mindset of many, if not majority of Filipino travelers in accepting less value for a lower price.

And this is a reality for some Filipinos. Whether we accept this or not, one cannot prevent or stop the emergence of low-cost providers, either you beat them or join them. After all, at the end of the day, still there will always be competition. How a business approach or attack rivals will be dependent on their chosen strategy and its implementation. It is therefore suggested to weigh or study all angles of strategy of a company/business organization in treating, dealing and competing with rivals, whether, traditional or not. Otherwise, a wrong move/decision would be enough to jeopardize its existing operations.